What Turnbull's income tax cuts could mean for you

Malcolm Turnbull has hinted that middle-income earners could receive a tax cut before the next election.

During his keynote speech at a Business Council of Australia dinner last night, the Prime Minister did not provide specifics, but pledged to address "bracket creep" for those earning between $37,000 and $90,000 a year.

"I am actively working with the Treasurer and my Cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus," said Turnbull.

"Higher taxes penalise people who are trying to get ahead.

"When you reward hard work and enterprise, you encourage hard work and enterprise — it's pretty simple."

Bracket creep occurs when inflation pushes taxpayers’ income into a higher tax bracket, forcing them to pay more out of every dollar without any increase in real-world purchasing power.

Nine Network's finance editor Ross Greenwood labelled the dangling carrot of tax cuts as "the ultimate electoral aphrodisiac" this morning, arguing the biggest dilemma for the government may be justifying the estimated $4.2 billion cost of sweeping tax reform.

At present, there's two potential ways to cut income taxes – but let's have a look at the rates as they stand:

Tax Rates (current)

Income earnt

Tax rate

$0 - $18,200

0%

$18,201 - $37,000

19%

$37,001 - $87,000

32.5%

$87,001 - $180,000

37%

$180,001 and over

45%

The most likely scenario would be for the government to lift the threshold for the middle-income - $37,001 to $87,000 – earners to $40,000 to $90,000.

Simply by raising the threshold by $3,000 would cost the government $4.2 billion and address the rising amount of Australians- particularly tradesman – hovering on the $87,000 mark.

For middle income earners, this would represent a saving of around $400 a year.

Under that strategy, the tax rates would look like this:

Tax Rates (proposed)

Income earnt

Tax rate

$0 - $18,200

0%

$18,201 - $40,000

19%

$40,001 - $90,000

32.5%

$87,001 - $180,000

37%

$180,001 and over

45%

Prominent economist Chris Richardson from Deloitte Access Economics told the Financial Review that there was a potentially better option: instead of raising the threshold for what defines a taxpayer as a "middle-income earner", why not drop the rate from 32.5 percent to 30 percent.

Under Richardson's proposal, lowering the tax rate to 30 cents in the dollar would cost the government $7.2 billion, and please an enormous number of Australian taxpayers in the process.

Tax Rates (Richardson proposal)

Income earnt

Tax rate

$0 - $18,200

0%

$18,201 - $40,000

19%

$37,001 - $87,000

30%

$87,001 - $180,000

37%

$180,001 and over

45%

A person earning $90,000 a year would save $1250 a year on tax according to this proposal.

Middle-income earners look to become the key to the next federal election, after a report by the Parliamentary Budget Office revealed that between now and 2022 almost 1 million Australians will experience bracket creep, shifting from 32.5 percent to 37 percent.